Buchholzer v. The Queen, 2003 TCC 573 (Informal Procedure)

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Appeal heard on July 23, 2003 at Windsor, Ontario

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JUDGMENT

The appeal in respect of assessments made under the Income Tax Act for the 1999 and 2000 taxation years is allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that deductions shall be allowed only for additional expenses agreed by the parties and listed in the Notice of Appeal.

Signed at Ottawa, Canada this 19th day of September, 2003.

J.M. Woods J.

REASONS FOR JUDGMENT

Woods J.

[1]      Mr. Eric Buchholzer is an accountant living in Windsor, Ontario. He appeals income tax assessments for the 1999 and 2000 taxation years that disallowed certain expenses claimed as business expenses.

[2]      The appeal was heard under the Court's Informal Procedure.

[3]      At the commencement of the hearing, counsel for the Crown stated that the parties had come to an agreement in respect of the expenses listed in the Notice of Appeal. Mr. Buchholzer stated that he wished to proceed with the hearing in order to comment on the conduct of the audit and present further claims.

[4]      In respect to the conduct of the audit, Mr. Buchholzer testified that, in his view, the auditor from the Canada Customs and Revenue Agency (the "CCRA") did not appreciate why the expenses claimed were business expenses and he questioned whether the auditor was competent to conduct a business audit. Mr. Buchholzer also thought the auditor acted unfairly towards certain charitable donations.

[5]      In reference to further claims not listed in the Notice of Appeal, Mr. Buchholzer submitted a four page chart listing various expenses that he submitted were deductible as business expenses. Attached to each item was a brief explanation such as "donation" and "boys remuneration." He also submitted summaries prepared by the CCRA that included explanations provided by him for certain items.

[6]      In cross examination, Mr. Buchholzer was asked to provide further explanation to support the business nature of the items referred to as donations and boys remuneration, which comprised many of the items claimed. In respect to donations, he stated that if a charity such as the Red Cross called his office to ask for a donation, the payment of the donation would be for business purposes. In respect to boys' remuneration, Mr. Buchholzer explained that items such as restaurant meals for his children were business expenses as they were compensation for services rendered by the children in connection with his business. When asked to explain why they were not personal expenses, Mr. Buchholzer stated that if they were personal expenses he would not have claimed them as business expenses.

[7]      The CCRA auditor then testified as to why she had allowed or disallowed the deduction of various items during the audit. She indicated that there was significant overlap between the expenses that the parties had already agreed upon and those in the four page chart submitted by Mr. Buchholzer at the hearing. She explained that, in respect to the expenses previously reviewed, she had allowed the charitable donations as donations but not as business expenses and that she had generally allowed the deduction of expenses for the children's meals.

[8]      Based on the evidence presented, I have concluded that the additional expenses claimed at the hearing were not incurred for the purpose of earning income from a business. For the most part, these expenses were personal or living expenses which cannot be deducted in computing income by virtue of paragraph 18(1)(h) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1. There simply was not sufficient information presented at the hearing to overcome the burden on Mr. Buchholzer to establish the business nature of the expenses.

[9]      In respect to the charitable donations and children's meals, the fact that Mr. Buchholzer stated that they were not personal expenditures and were laid out for the purpose of earning income is not determinative. This must be supported by the objective evidence.

[10]     Meals for one's children are an ordinary everyday expense and it was incumbent on Mr. Buchholzer to establish that these particular meals were primarily motivated by business reasons. The evidence led by Mr. Buchholzer failed to establish this.

[11]     Similarly, charitable donations are typically personal expenses. As Jackett, P. stated in the leading case of Olympia Floor & Wall Tile(Quebec) Ltd. v. M.N.R.[1]:

Ordinarily one thinks of charity as a personal matter. One gives of what one would otherwise have for oneself for the relief of poverty in others or for education or other "good works."

[12]     It is possible to establish that charitable donations are deductible as business expenses, as Olympia Floor illustrates, but this would require evidence linking the expenses to the income-earning process. No evidence was led as to the likely effect of the donations on business profits as was established in the Olympia Floor case. In the absence of further evidence showing that the donations would likely have a positive effect on the profits of the business, I find that the donations paid by Mr. Buchholzer are personal expenses and not deductible by virtue of paragraph 18(1)(h).

[13]     As to the conduct of the audit, Mr. Buchholzer's testimony of alleged improper conduct fell far short of establishing an abuse of process.

[14]     As a result, the appeal will be allowed and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment of the 1999 and 2000 taxation years on the basis that deductions be allowed only for additional expenses that were agreed between the parties and listed in the Notice of Appeal.

Signed at Ottawa, Canada this 19th day of September, 2003.

J.M. Woods J.